GNP GROWTH MARRED BY DEPRECIATING RUPEE

SHAMSUL GHANI (shams_ghani@hotmail.com)
Sep 29 - Oct 12, 2008

A more than 30 per cent fall in rupee value during the last three months puts a further question mark on the real value of GNP growth which is already under scrutiny in the wake of a historically high inflation rate. The GNP growth of 20.5 per cent in FY08 is being seen more as price-based instead of output-based. Since, for the sake of uniformity, all global economic values are stated in dollar terms, our GNP growth stands to face a tough test in the years to come. While the output-based sustained real growth will take a lot of doing, the sliding rupee will understate our macroeconomic achievements. The following table gives a summarized view of our economic progress made during the last seven years.

GDP & GNP (OUTPUT AT CURRENT FACTOR COST)

Million Rs

SECTOR

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Agriculture

968,291

1,059,316

1,164,751

1,314,234

1,457,222

1,698,000

2,016,950

Industrial

989,349

1,083,914

1,416,986

1,659,285

1,923,698

2,196,657

2,635,232

Services

2,188,527

2,390,988

2,668,790

3,149,049

3,777,607

4,362,737

5,253,917

GDP

4,146,167

4,534,218

5,250,527

6,122,568

7,158,527

8,257,394

9,906,099

Nominal GDP % Growth

-

9.36

15.80

16.61

16.92

15.35

19.97

Real GDP Growth

-

4.73

7.48

8.96

5.82

6.83

5.78

Net Factor Income

23,665

151,812

124,478

134,461

149,901

158,481

233,986

GNP

4,169,832

4,686,030

5,375,005

6,257,029

7,308,428

8,415,875

10,140,085

Population in million

143.17

146.75

149.65

152.53

155.37

158.17

160.97

Per Capita Income (Rs)

29,125

31,932

35,917

41,022

47,039

53,208

62,994

Dollar Exchange Rate

61.43

58.50

57.57

59.34

59.86

60.63

61.35

Per Capita income ($)

474

546

624

691

786

878

1,027

Increase in per capita (%)

-

15.13

14.30

10.81

13.67

11.68

17.00

Per Capita GDP (Rs)

28,960

30,898

35,085

40,140

46,074

52,206

61,540

Per Capita GDP ($)

471

528

609

676

770

861

1,003

ARE GNP / GDP REAL INDICATORS OF ECONOMIC HEALTH & LIVING STANDARDS?

Huge importance is attached to the basic macroeconomic indicators particularly GDP and GNP. While few commoners know the actual size of GDP, the easy to remember normally single-digit per cent growth is quoted in all sorts of discussions ranging from economical to political. No doubt this briefest of all brief statistics is a tell-tale sign of the health of an economy. Most critical economic ratios are shown as percentage of GDP. Many political arguments could be won on the basis of this vital indicator. For example, the average GDP growth during the 28 years of democratic rule forming part of Pakistan's political history was less than 4 per cent as against an average GDP growth of 6 per cent attained during the 33-year dictatorship era.

Saying goes that economists are more interested in economic achievements rather than the rulers under whose rule these achievements were made. Yet, these economists are baffled by the anomalies that go with these all important indicators. For example, since only values are measured, any improvement or deterioration in the product quality is not recorded. The hazardous impact on environment and lethality of the products is also not accounted for. Production of millions of cars and air-conditioners is boasted without recording the impact of their use by energy and fuel deficient economy, let alone the environmental damage that these products are known to cause. A highly developed economy may boast of producing and selling weapons worth a trillion dollar without measuring the extent of death and destruction these weapons will cause.

GDP / GNP fail to record production and sale of illegal product. Firearms produced in FATA and northern areas are the example. The huge poppy cultivation and its illegal export are not recorded in Afghanistan or US economies. Yet another important omission is black-money-based business. Undocumented cash sales made to evade income tax, GST etc. do not come under the GDP regime. It can be safely concluded that all GDP and GNP indicators are understated, the assumption being that no conscious efforts are made to overstate any data.

PER CAPITA INCOME

The dividing line between GDP and GNP is net factor income from abroad. Positive net factor income results in a higher GNP, and vice versa. During the last five years, we enjoyed a persistently healthy rise in this head of income that grew from Rs.152 billion in FY03 to Rs.234 billion in FY08. The GNP divided over the country population gives us yet another, easy to remember and important, economic indicator known as per capita income. Just to digress a bit, the average per capita income during Zia's 11-year rule was $346 which increased by 20 per cent to $415 during the 12-year BB-Nawaz eras. Finally, during the 8-year rule of Musharraf, the average per capita income increased by 71 per cent to $709.

The denominator of population is critically important as it can overstate or understate the vital economic indicator. Official population figures have always been a bone of contention for our economists. A stable foreign currency rate affords accurate reporting of per capita income in dollar terms. During the last seven years, dollar moved in a very narrow range and thus did not negatively impact the growing per capita income rate. The situation during the last three months has dramatically changed to our economic detriment. The subsequent adjustments have brought down the FY08 per capita income figure from $1085 to $1027. Viewed in terms of the current rupee value, the FY08 per capita income is reduced to a dismal $802. The irony is that the currencies of other developing economies are showing strength against dollar in the wake of a meltdown in the US economy. We are doubly disadvantaged against other world economies.

The coming years are going to be more difficult than one can imagine. Prudent economic measures to control inflation and rupee slide are required. The inflationary and exchange instability factors will have to be neutralized through output increase for which agriculture and industrial sectors will have to be given much needed impetus to boost our national income.